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Received December 2008 Revised August 2009 September 2009 Accepted October 2009

A decision support system for improving performance of inventory management in a supply chain network
Hooshang M. Beheshti
Department of Management, College of Business and Economics, Radford University, Radford, Virginia, USA
Abstract
Purpose This article seeks to present a decision support model for improving supply chain performance. The model aims to provide a holistic view of the supply chain as an integrated system by analyzing inventory options to facilitate the decision-making process by business partners in the system. Design/methodology/approach In recent years, organizations have focused on incorporating both internal and external business activities of their supply chain into an integrated system. The goal of integration of all supply chain activities is to maximize total systems performance while minimizing costs. Literature review and professional experience in the eld provided the foundation for the model development in this research. Findings The article demonstrates the usefulness of a decision support model in analyzing and developing a cooperative environment among supply chain members in order to reduce the cost of inventory as well as the cost of goods sold. The effects of utilizing such tools as just-in-time and electronic business systems are illustrated and discussed. Research limitations/implications The proposed model demonstrates disadvantages of individual optimization in an integrated supply chain system as well as the advantages of collaboration of supply chain members in nding the minimum cost. The model uses one manufacturer with multiple retailers and distributors. Future research in this area could expand the model to allow multiple manufacturers. Practical implications The decision support model allows decision makers along the supply chain to employ a series of what-if analyses to evaluate different scenarios with regard to lowering the cost of products reaching the consumer. Originality/value The model developed in this paper provides the foundation for future research as well as support for decision making when various decision makers are involved. Keywords Supply chain management, Negotiating, Decision support systems, Just in time, Electronic commerce Paper type Research paper

International Journal of Productivity and Performance Management Vol. 59 No. 5, 2010 pp. 452-467 q Emerald Group Publishing Limited 1741-0401 DOI 10.1108/17410401011052887

Introduction In todays dynamic and competitive business environment, inventory managers of manufacturing and retail organizations are increasingly under pressure to develop systems that enable them to minimize inventory costs, improve the ow of inventory in the supply chain, and meet customer demand in a timely fashion. In most organizations, inventory can be as much as 50 percent of the rms scal assets (Render et al., 2009). A properly managed inventory system can considerably improve the rms performance (Min and Pheng, 2005; Koumanakos, 2008) and productivity by

reducing the costs of activities related to intra- as well as inter-rm inventory management. In general, inventory managers have one major concern that is to produce or stock the right amount of inventory to meet demand. On the one hand, excess inventory results in increased carrying or holding costs limiting the availability of capital to the rm to invest in other business projects. On the other hand, not having enough inventory could result in shortage costs such as lost sales and even customers. The classic inventory management model is the economic order quantity (EOQ) which nds the most economical balance between inventory carrying costs and ordering/set up costs. The model is designed to nd the EOQ for buying materials or products as well as economic production quantity (EPQ) or lot size for manufacturing. The literature on the use of basic EOQ or modied versions of EOQ to minimize the cost of managing inventory for both purchasing and manufacturing systems is extensive (Brimberg and Hurley, 2006; Drezner et al., 1995; Evan and Porteus, 1985; Federgruen and Zheng, 1992; Hadley and Whitin, 1963; Huang, 2003; Osteryoung et al., 1986; Salameh and Jaber, 2000; Sana, 2008; Zheng, 1992). These models are developed primarily for a single location and focus on the rm as the system and contain analysis and computations optimizing or nearly optimizing a rms inventory operations. A growing stream of literature over the last two decades has examined the benets of integrated inventory models where both manufacturer and buyer can work together to arrive at a joint economic order quantity (Goyal and Deshmukh, 1992; Hill, 1997; Lu, 1995; Clark and Scarf, 2004; Caglar et al., 2004). However, in the latest literature, the emphasis on the effective and efcient management of inventory has been placed on the value of cooperation and collaboration between supplier and buyer, as partners, in a supply chain management (Disney et al., 2008; Ozer, 2003; Kilty, 2000; Lee et al., 1997; Ramcharran, 2001). The supply chain management approach to cost minimization of inventory implies that a business can no longer compete in the global marketplace by becoming an efcient entity by itself. This approach requires careful planning and coordination of all activities of the supply chain partners who are involved in the movement of materials and products from the supplier to manufacturer to distributor (wholesaler/reseller) to retailer to consumer. Managing inventory is considered to be one of the most important areas of supply chain management (Ganeshan, 1999; Fisher, 1997; Presutti, 2003). Over the years, businesses have adopted new technology to integrate business activities in order to lower costs in their operations. Advances in information technology, expansion of the internet and electronic business have made it possible for suppliers and buyers to better manage their supply chain management systems by establishing electronic linkages, improve inventory management and control, and monitor the ow of goods in real time. In recent years, many rms have invested in enterprise resource planning (ERP) in order to integrate all business activities into a uniform system with a common and central database in the organization (Beheshti, 2006; Davenport, 1998; Chandrashekar and Schary, 1999). Recently, ERP systems have become a part of the extended enterprise and serve as a platform for collaboration between business partners in the supply chain by providing decision-making support to improve supply chain performance (Hendricks et al., 2007; Jacobs and Weston, 2007; Weston, 2003). The use of technology in businesses today and the availability of information in corporate databases require inventory managers to have access to an

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interactive decision support system that allows the manager to evaluate the rms alternatives with regard to supply and demand variability and nd a solution that is satisfactory for the rms supply chain and its partners. A decision support system (DSS) models information to assist managers during their decision-making process. A DSS can use internal information available in corporate databases or external information from such sources as the government or the competition (Laudon and Laudon, 2001). Ahuja and Hanna (2004) emphasize the importance of decision support systems (DSS) in business-world decisions when quantitative models such as EOQ are used. This article presents a decision support model that can be used as a decision making tool by members of a supply chain network (manufacturer, distributor/wholesaler/intermediary, and retailer) to reduce the cost of managing inventory for the network. The model can be used for a variety of businesses that are part of a supply chain network structure in both domestic and global systems. Integrated supply chain systems The importance of effectively managing the material ow across the supply chain has in recent years been increasingly emphasized by practitioners and academicians alike. The increased attention is mainly due to the potential for a company to achieve growth and generate nancial returns by minimizing the costs associated with the supply chain (Handeld and Nichols, 2002). According to Quinn (1997), total supply chain costs represent the majority share of most organizations operating expenses, and for some industries more than 75 percent. Actively improving their supply chain management will enable these organizations to improve their ow of materials and information towards the end user and at the same time their operating costs can be kept to a minimum (Handeld and Nichols, 2002). As a system, supply chain management can help organizations to gain a competitive edge (Helms et al., 2000) through the reduction in inventory levels (Closs et al., 1998; Pagel, 1999; Stank et al., 1999; Quinn, 2000), better responsiveness (Lalonde and James, 1994; Stank et al., 1999) and lower throughput time (Stank et al., 1999). SCM could also be considered a tool for achieving short-term economic benets and at the same time gaining long-term competitive advantages (Folinas et al., 2004). In recent years, the focus on traditional SCM has shifted away from engineering and improvement of individual functional processes to the coordination of activities in dynamic supply chain networks (Grieger, 2003). According to Lee (2005), we are in the era of supply chain competition, that is, competition today is based on supply chain versus supply chain and not business versus business. Integrative technologies such as electronic data interchange (EDI), electronic commerce (EC), and ERP are the key to the functional integration of three basic phases of the supply chain, procurement, conversion (production), and distribution into an integrated supply chain management system as shown in Figure 1.

Figure 1. Integrated supply chain system

Each member in Figure 1 may have incoming materials, in-process, and nished goods inventories; the materials and distribution inventories change among the members as value is added in the process. The suppliers nished product inventory feeds the buyers incoming materials inventory. Value is added by distribution costs without any intermediate conversion process. Specic conversion processes within member rms may vary from manufacturing to assembly to packaging to stocking. Although the specic parameters for inventories will be different, the basic inventory problem is the same for each supply chain member. When the rm is viewed as the system, its total inventory must be optimized and not just the materials or the conversion or the distribution system. In addition, rms at each stage of the supply chain must coordinate inventory systems with their supplier and customer rms. The buying rms inventory needs are determined by their customers. In essence, the supply chain inventory system must be studied and not just that of the rm. Intra-supply chain system requires systematic rather than atomistic optimization. If any member rm in the supply chain optimizes its position, the supply chain inventory as a system cannot be optimized. This article presents a method for developing spreadsheet-based decision support models to optimize inventory in a supply chain system. A hypothetical, multi-level distribution system is used to illustrate the computations and analysis. The procedure can be applied to a variety of supply chain structures both domestic and global. Negotiation goals, which the adoption of the model will help attain, are provided at the end of the article. Structure of the model The hypothetical supply chain in Figure 2 has a manufacturer selling to three identical full-service distributors, each of which sells to four identical retailers. Each of the 12 retailers has an annual demand, Dr of 200 items. Therefore, each distributors demand, Dd is 800. The manufacturer must meet the total demand, Dm of 2400. By convention, the supply chain demand, Dsc is established as that of the smallest member, allowing expressing the demand of members in multiples of Dsc as shown in Figure 2. Thus Dm 12Dsc, Dd 4Dsc and Dr Dsc. The S-variable is the cost of each ordering cycle. Sm, in the example, represents a $1000 setup cost. Order processing costs of the manufacturer must also be included in Sm. Sd and Sr are the distributor and retailer ordering costs per cycle. Each distributor has costs both of processing its orders with the manufacturer and of handling the retailers orders. Any conversion costs marginal to the distributor processing of an order, such as repacking, must be included in Sr. The variable inventory holding cost factor, I, is a percent of inventory value for a given time period. Landeros and Lyth (1989) showed the need for using separate I-factors in a two-party, buyer-seller exchange. In a supply chain model, the I-factors

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Figure 2. Supply chain structure for decision support model

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for all members must be determined. Members with similar I-factors should be grouped together; the number of groups determined by the precision of the results that is required. In this example, it is assumed that the retailers can be grouped together, and that the distributors fall into another group. The time lengths for D and I must agree and be the same for all supply chain members. If D is annual demand, I must represent the cost factor for a year. Selecting a different time period, which may be more appropriate or convenient for gathering data, will give the same optimum order quantity for the supply chain. Cost calculations have the same time length period as the inputs. Costs for each supply chain member must reect the book value which is the relevant value for the I-factor and cost of holding inventory. Added distribution and intermediate member mark-ups will raise the cost (C) as products progress through the supply chain. The value added can be factored as a percent of the manufacturers costs or estimated individually for supply chain groups. The robustness of inventory models allows grouping similar members whose costs are reasonably close. The example assumes that retailers and distributors can be lumped into separate homogeneous groups. Formulation of optimum supply chain order quantity for DSS In developing an economic order quantity model, it is conventional to add two different variable costs; ordering costs and holding (carrying) costs. The cost of goods purchased which is equal to the quantity of demand per year times the cost per unit is usually not included in the calculation of the total cost function since it is independent of how much is ordered each time and remains constant. However, in a situation where the supplier is willing to offer discounts for larger orders with price breaks or quantity discounts, the cost of the goods purchased should be added to the total cost function. A decision support system model was developed using Excel spreadsheet. The main objective of the DSS model here is to nd the minimum total cost of the supply chain as a system. The total supply chain costs are simply the sum of all the individual members costs. The computation requires setting down all costs, grouping the costs into setup (order), holding, and solving. This section provides the computational rationale for the model. Total inventory costs for the supply chain (TCsc) is the sum of all the inventory costs for the members as TCsc TCm 3(TCd) 12(TCr). However, the total inventory costs of the individual members are the sum of their setup/order costs plus holding costs. From the EOQ formulation, the supply chain costs can be expressed as: TCsc Dm Sm =Qm Im Cm Qm =2 3Dd Sd =Qd Id Cd Qd =2 12Dr Sr =Qr Ir Cr Qr =2 All demand quantities are then expressed in terms of Dsc and order quantities in terms of Qsc. After combining terms and simplifying, the supply chain inventory ordering and holding costs are: TCsc Dsc Sm 3Sd 12Sr =Qsc 12Im Cm Id Cd Ir Cr Qsc =2 Dening supply chain setup/order cost as Ssc Sm 3Sd 12Sr and the holding cost as Hsc ImCm IdCd IrCr the supply chain total cost can be redened as

* TCsc DscSsc/Qsc HscQsc/2. The optimum supply chain order quantity (Qsc) and * ) can be presented as: total cost (TCsc p Q* 2DscSsc=Hsc sc

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p TC* 2DscSscHsc sc For the hypothetical supply chain problem, the data used for and the computations resulting from the DSS model are displayed in Table I. It should be noted that the output gures from the model presented in Table I are rounded to the nearest integer and thus vary slightly from the actual values, but the variation is insignicant. Although the model is capable of providing gures with a great deal of precision, the gures presented in the following tables may have apparent errors due to rounding. The purpose of the values presented in these tables is not to gain a great deal of precision but rather to provide a basis for further discussion that follows. The efciency index Pena et al. (1997) introduced an efciency index model to assist buyers to determine whether there is an adequate supply of inventory for a specic part or raw material during the lead time (supplier delivery time). In their model, if the efciency index for a particular inventory part or item is calculated to be less than 1 that indicates that there is a chance of shortage of that item during the lead time. They proposed that the ideal index should be between 1 and 1.5; an efciency index of more than 1.5 could result in an inventory overage which could be costly to the rm. Their model provides managers with a system to evaluate the status (adequate/shortage/overage) of inventory during the lead time. The model presented in this section provides supply chain partners with a tool to determine the optimum inventory order quantity that will minimize the cost per unit for the consumer. In addition to determining optimum quantity, a major goal of the model is to determine the effect if the supply chain does not use the optimum. The efciency index (EI) measures how much costs vary from the

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Input data and results Number of members Demand multiple Annual demand Setup/order cost Holding cost factor (%) Book value/unit Supply chain and its members setup/order cost Supply chain and its members holding cost Optimum quantity Optimum total cost Supply chain Qsc for the member Q * Unit costs for member optimizing Unit costs for supply chain optimizing

Manufacturer Distributors Retailers 1 12 2400 1,000 20.0 12 1,000 28.80 1,414 3,394 118 5.69 3 4 800 40 30.0 16 120 57.60 115 554 29 6.06 12 1 200 50 40.0 20 600 96 50 400 50 4.77

Supply chain

200

1,720 182.40 61 11,202 61 4.67

Table I. Input variables for DSS and member computations

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optimum. It is dened as the actual supply chain cost divided by the optimum. It can be determined for each member in the chain or for the chain as a whole as: EIsc TCsc =TC* ; where EIsc $ 1 sc

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If the supply chain optimizes, EIsc is 1.0; however, each individual members efciency index will be greater. Efforts by the individual members to optimize will drive the supply chain away from its optimum. To determine the effect on individual members, p the standard EOQ is computed using 2DS=IH for each member. Thus, the manufacturers EOQ, if it were operating without regard to other members would be 1414. The distributors EOQ would be 115 and the retailers would be 50, if they did not consider other members in the chain. These optimums are shown in Table I. The optimum cost for each member, if acting independently, is also shown. Using the input data from Table I, the supply chain minimum annual cost (TCsc) and the manufacturers least possible annual cost (TCm) would be $11,202 and $3,394 respectively as shown below: Ssc 1; 000 3* 40 12* 50 1; 720 Hsc 120:20* 20 0:30* 16 0:40* 20 182:40 Q* sc TC* sc Q* m TC* sc q 2* 200* 1; 720=182:40 61:2160 61

p 2* 200* 1; 720* 182:40 11; 202:29 11; 202

q 2* 2400* 1; 000=0:20* 12 1; 414:2134 1; 414 p 2* 2; 400* 1; 000* 0:20* 12 3; 394:1125 3; 394

* Each distributors lowest cost (TCd) would be $554, and each retailers (TCr*) would be $400 and computed in the following manner. q Q* 2* 800* 40=0:30* 16 115:47 115 d

TC* sc

p 2* 800* 40* 0:30* 16 554:2562 554 Q* r q 2* 200* 50=0:40* 20 50 p 2* 200* 50* 0:40 400

TC* sc

The next to last basic computation in Table I is to determine what the supply chain quantity Qsc would be if that member optimized. This is computed by dividing the

optimum quantity, Q *, by the demand multiple for the column. Thus, if the manufacturer optimizes, the distributors quantity (Qd) would be 471 (1,414/3) the supply chain quantity, Qsc is 1,414/12 117.83 or 118. The last computation in Table I is the unit cost for the channel if the individual members tried to optimize using the TCsc equation and dividing it by the annual demand of 2,400. As expected, using the supply chain optimum quantity, the total channel cost is minimized at $4.67 (11,202/2,400) per unit. If the manufacturer was inexible and wanted fewer orders because of much higher storage quantities, the total supply chain and unit costs would be $13,667 and $5.69 respectively as shown below. TCsc 200=117:851; 720 117:85* 182:40=2 $13; 666:88 $13; 667 Unit cost $13; 667=2400 $5:69 If the distributors would optimize because they would want to decrease their storage costs which would drive up setup/order costs, this would increase the cost to $6.06 [((200/28.87) *1,720 28.87 *182.4/2)/2,400] per unit. Using efciency index in negotiations Table II illustrates the use of the EI; once the optimum quantities and costs are known, other quantities can be tested by calculating EI. Actual costs can be found from * * EIsc (Qsc/Qsc Qsc/Qsc)/2 by using the optimum quantities (Q *) and quantities to be tested (Q) and then multiplying by TC *. The manufacturers optimum Qm is 1414. If used, Qd would be 471 (1414/3) and Qr and Qsc would both be 118 (1414/12), as shown in the rst row of boxes in Table II. Calculating EI for each supply chain member and for the supply chain, the manufacturer is obviously 1.00 since it is at the optimum, but the distributor at 2.16 and the retailer at 1.39 are far from their optimum. The supply chain cost is 1.22
Optimizer Manufacturer Quantity EI Total cost Distributor Quantity EI Total cost Retailer Quantity EI Total cost Supply chain Quantity EI Total cost Manufacturer 1,414 1.00 3,394 346 2.16 7,344 600 1.39 4720 737 1.22 4,141 Distributors 471 2.16 1,199 116 1.00 554 200 1.16 640 246 1.30 719.80 Retailers 118 1.39 557 29 1.15 462 50 1.00 400 61 1.02 408.50 Supply chain 118 1.22 13,667 29 1.30 14,550 50 1.02 11,440 61 1.00 11,202

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Table II. Individual member costs of optimizing alternatives

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(13667/11202) times its optimum of $11,202. The second row of boxes shows the data if the distributor optimizes while the third row shows the retailer optimum. Note that if the retailer dominates, the total channel costs are only 2 percent above the optimum. Table III provides a summary total cost for all supply chain members and it shows clearly where the negotiating problems will be. The manufacturer will not consider the distributors optimum because it will drive the manufacturers cost up from $3,394 to $7,344. The distributors feel the same about the manufacturer; their costs would go up from the optimum of $1,663 to $3,597 if the manufacturer dominated the negotiation process. Although the supply chain optimum offers the best total cost, no member optimizes. In the give-and-take of negotiations, the model suggests that either the supply chain optimum or the retailer optimum might be acceptable targets. As was mentioned previously, the retailer supply chain EI is 1.02, meaning only 2 percent above the optimum. Costs of ignoring efciency index Supposing, in the above example, that supply chain members decided to manufacture * and distribute on a semi-annual basis rather than annually. Instead of using Qsc of 61, as given in Table I, a Qsc of 100, equal to one half Dsc of 200, is used. The efciency index would be: EIsc 100=61 61=100=2 1:125 TCsc EIsc TC* 1:125 $11; 202 $12; 602 sc The fact that a change of about 64 percent from the optimum quantity increased cost by only 12.5 percent above the optimum illustrates the power of the model. However, the further away from the optimum one operates the more sharply the costs rise. Negotiations Supply chain negotiations of the sort where this model would be useful can be done best when there is an understanding of supply chain partnership among members and
Optimizer Manufacturer Total cost Unit cost (TC/D) Distributor Total cost Unit cost (TC/D) Retailer Total cost Unit cost (TC/D) Manufacturer 3,394 Distributor 3,597 Retailer 6,675 Supply chain 13,667 5.69 14,551 6.06 11,440 4.77 11,202 4.67

7,344

1,663

5,544

4,720

1,920

4,800

Table III. Total and unit costs for the supply chain

Supply chain Total cost Unit cost (TC/D)

4,141

2,159

4,902

without adversarial relations. A basic rule for successful negotiation is to know the bargaining position of the negotiating partners. The gures in Tables I to III provide a basis from which to start. They provide the optimizing quantity, costs and EI for each member under each optimizing situation. Table I shows that the supply chain is the best alternative position to their optimum positions for both the manufacturer and retailers. It is a close second best to optimizing for the distributors. Once the members have agreed to a cooperative inventory rather than individual attempts to optimize, the supply chain quantity determined by the model is the quantity to which the members should agree on. Whereas Table I gives the cost per distributor and retailer, Table II gives the supply chain costs of distributing and retailing. It is a useful synopsis when determining the supply chain structure. The distributor and retailer costs in Table I are multiplied by the number of distributors and retailers in the supply chain. Although the manufacturer as a single rm dominates the other individual members, Table II shows that the other levels have a good deal of dollar voting power, collectively. Indeed, the retailers spend more on supply chain than the other members regardless of which optimum is used. In supply chain negotiations, the individual members must see the benets of cooperation toward the supply chain optimum. Because supply chain costs to every member will be higher that the individual optimums, there must be some other payoffs. The use of the model can show how the other payoffs can be introduced and what effects they will have.

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Increased sales The gures in Table III demonstrate how supply chain costs or allocated expenses of the supply chain will be lowered (or prots increased) if the supply chain is optimized. The unit cost savings may be passed on to the consumers as price savings or better customer service. The market elasticity will determine whether it is more protable to pass the savings on to the consumer for increased sales volume or to retain the savings in the chain. Market elasticity could be built into the model. Assume that the manufacturer is now driving the supply chain at a unit cost of $5.69 and that the retailers have a 50 percent markup over cost, selling at $30.00. If $1.00 of the total supply chain savings of $1.02 ($5.69-$4.67) were passed on to the retailer, the marked-up price could be lowered to $28.50 per unit. With an inelastic market, the supply chain members would probably decide to keep the same retail price unless market share was the primary goal. With an elastic market, the members would have to determine whether the increase in revenues would increase prots if the savings were passed on to the consumer price. In any event, it will raise supply chain productivity and competitiveness in the marketplace. The savings are not always obvious. The model is useful in determining the results of what if questions. Two types of problems are examined below. First are the savings which can be made by reducing ordering costs and setup costs through electronic commerce (EC) and/or just-in-time (JIT). Second are the questions of changes to the supply chain structure.

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Reducing setup/ordering and carrying costs The two most signicant changes into the supply chain and its members in recent years have been the implementation of JIT and EC. Successful implementation of both has reduced the inventory size and costs through more efcient ordering. In addition, JIT reduces the setup cost per order for the manufacturer by simplifying changeover between production runs for similar items. However, JIT and EC costs money to implement, and both require a commitment to long-term supply chain relations. The model can be used to test changes in our hypothetical supply chain as shown in Table IV. The top row shows each of the members optimum position, initially entering negotiation. If the manufacturer optimizes, its quantity will be 1,414 with a total cost of $3.394. The unit cost to the manufacturer will be $1.41 for each of the 2,400 items it makes. If the distributors optimize, their cost will be $.69 per item and the retailers will have a $2.00 cost if they optimize. The sum of the minimum costs is $4.10, well below the supply chain optimum cost of $4.67, but it is infeasible for everyone to optimize. Once again, if any member minimizes individual costs, all other members and the supply chain are driven away from their optimums. The second row in Table IV shows the actual quantity, total cost, and cost per item if the supply chain rather than individual members optimize. Every member is driven above its optimum cost, with the manufacturer and the distributor being the hardest hit. The manufacturers quantity is about half of its optimum because of the high storage costs its optimum would cause to other members. The distributors quantity is more than twice its optimum, since the small lot sizes they favor would make setup costs skyrocket. Let us assume that implementing electronic commerce between the distributors and the manufacturer results in a 50 percent reduction (from Sr $40 to 20) in the distributors ordering costs through automated ordering, billing, transportation, documentation and inventory posting. Table IV shows that a decrease in total supply chain costs from $11,202 down to $11,006, or a decrease in unit costs from $4.67 to $4.59. The distributors costs are reduced from $.90 to $.81. Although the distributor would apparently welcome this cost reduction, the decrease in quantity per order for the supply chain optimum drives the manufacturer even further from its optimum cost. The Retailer (EC) row in Table IV shows what would happen if there were an EC installation between the distributors and the retailers reduced ordering costs, Sr, by 50 percent from $50 to $25. The supply chain cost is reduced to $9,892 and the unit cost decreases to $4.12. There is a noticeable reduction in both the distributors and retailers per unit costs. The retailers are well below their costs before the negotiations began. The manufacturers costs have continued to go up. Not only does the manufacturer not have the benet of using its own optimum, it costs even more than when it started to use the supply chain optimum. There is a $1,310 annual savings from having the EC. This would not begin to pay for EC among the supply chain members, but both supply chain negotiations and EC imply a range of items with a high dollar value. As the manufacturer earns single source recognition for a broader range of compatible items, the setup costs of converting production from one product to another will be reduced. The manufacturer will begin to operate under, and go to its supply sources using, JIT. The next to last row gures show the effects of being able to cut back setup costs to 25 percent of the

Condition Individual optimizes Q* TC * Unit cost (TC/D) Supply chain optimizes Q TC Unit cost (TC/D) Distributor (EC) Q TC Unit cost (TC/D) Retailer (EC) Q TC Unit cost (TC/D) Manufacturer (EC JIT) Q TC Unit cost Supply chain (EC JIT) Q TC Unit cost (TC/D)

Manufacturer 1,414 3,394 1.41 737 4,141 1.73 724 4,184 1.74 670 4,388 1.83 439 1,894 0.79 621 1,339 0.56

Distributor 116 1,663 0.69 246 2,159 0.90 241 1,937 0.81 223 1,751 0.73 146 1,381 0.58 207 977 41

Retailer 50 4,800 2.00 61 4,902 2.04 60 4,485 2.04 56 3,754 1.56 37 3,396 1.42 52 2,401 1.00

Supply chain 61 11,202 4.67

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61 11,202 4.67 60 11,006 4.59 56 9,892 4.12 37 6,671 2.78 52 4,717 1.97 Table IV. Effects of EC and JIT implementation

original by the manufacturer as the result of integrating both EC and JIT. The last row gures are computed with the assumption that in addition to setup/ordering cost savings discussed above, supply chain members can reduce their holding costs by 50 percent because of EC and JIT applications in the supply chain network. These gures can provide a strong support for the members to use technology to create an electronic supply chain network of business partners in order to be more agile, productive and competitive in todays cost and time sensitive market. Summary and conclusions Inter-rm supply chain systems, widespread implementation of just-in-time, and proliferation of electronic commerce and the internet are enabling business partners in a supply chain network to improve their performance by collaborating with each other in order to lower the cost of inventory, meet customer demands, and be competitive. Optimization techniques can provide a powerful foundation for the development of spreadsheet decision support systems to assist supply chain members to negotiate and make decisions that are the best for the system. The main objective of this research was to develop an optimization technique for a multi-level supply chain system to demonstrate that when the supply chain optimizes as a system and the supply chain network members work together to improve efciency of the system, they can benet

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from trickle down effects which can be derived from the model. The model also shows the benets of incorporating electronic commerce and just-in-time method. The main theoretical contribution of this study is the development of a mathematical model that can be used in an entire supply chain system to show its members the benets of cooperation with regard to inventory management. A further contribution is the development of an efciency index that can be used to evaluate the degree and the cost of deviation from the optimum by any member of the chain. Similar to any research project, the presented model has limitations that can be overcome in future studies. The model that has been presented here assumes that demand is deterministic for the members of the supply chain and that the rate of usage is reasonably constant. In addition, shortage or stock out costs and quantity discounts are not incorporated in this model. However, the model can be used as a powerful spreadsheet base which can be expanded to answer a variety of supply chain structures, cost saving tools, and negotiation questions. To mention just a few: . As the distributed prices go down, the book value of the inventory will decrease, thus lowering holding costs per item. . As holding costs decrease, the optimum quantity will tend to increase, allowing the manufacturer to produce a more effective lot size. . As the savings in inventory and production costs are passed on to the customers, demand for items in the efcient supply chain will increase, starting a snowball effect. . Analyzing the supply chain Ssc and Hsc parameters show where supply chain costs are incurred. On the one hand, perhaps the manufacturer may be under capital constraints and the manufacturers inventory should be eliminated. On the other hand, perhaps the inventory cost factor times costs (IrCr) of the retailers is so much higher than those of the manufacturer, that using the just-in-time delivery method to the retailers is the best for the entire chain. . By examining the I-factors separately, areas could be found where inventory holding costs might be reduced such as the postponement of nal production/assembly, supply chain insurance, and optimizing warehouse location and operating costs. . Supply chain make-versus-buy, lease-versus-own, public-versus-private warehouse and transportation decisions could easily be integrated into the model. . These factors, coupled with advances in technology, demonstrate the need for supply chain cooperation in establishing long-term relationships that result in lowering inventory costs and the ability to compete in an ever-changing global market.
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Render, B., Stair, J.r., R, M. and Hanna, M.E. (2009), Quantitative Analysis for Management, 10th ed., Pearson Education, Upper Saddle River, NJ. Salameh, M.K. and Jaber, M.Y. (2000), Economic production quantity model for items with imperfect quality, International Journal of Production Economics, Vol. 64 Nos 1-3, pp. 59-64. Sana, S.S. (2008), An economic order quantity model for seasonal goods, International Journal of Operational Research, Vol. 3 Nos 1-2, pp. 97-118. Stank, T., Michael, C. and Miren, A. (1999), Benets of interrm co-ordination in food industry supply chains, Journal of Business Logistics, Vol. 20 No. 2, pp. 21-41. Weston, F.C. (2003), ERP II: The extended enterprise system, Business Horizons, Vol. 46 No. 6, pp. 49-55. Zheng, Y.S. (1992), On properties of stochastic inventory systems, Management Science, Vol. 38 No. 1, pp. 87-103. About the author Hooshang M. Beheshti is professor and chair of the Department of Management at Radford University, Radford, Virginia. He has over 30 years of experience as an educator and consultant. He has co-authored two textbooks, one in management science and one in information systems and has published extensively on a variety of management topics. He is one of the co-founders of the International Academy of Business Disciplines (IABD) as well as one of its past presidents. He currently serves on the board of directors of IABD and IABD Foundation. Hooshang M. Beheshti can be contacted at: hbehesht@radford.edu

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